Jared Bernstein Explains the Connection Between Stimulus and Banking Rescue

Politically speaking, both the idea of a fiscal stimulus package in general and the specific stimulus plan working its way through the legislative process are quite possible. Rescuing — or “bailing out” — the financial system is another matter. This is a concept that voters rightly recoil from, because essentially anything you could do flies in the face of intuitive ideas about fairness. And getting down to details doesn’t much help, frankly. You could do things that are less unfair, but they wind up seeming distressingly radical to other people. And they still don’t wind up being very fair. There’s just no way around it.

But as Jared Bernstein was explaining on a call with progressive bloggers earlier today, stimulus and financial system recovery go hand in hand. Bernstein described the relationship in terms of a “chain.” The technical term involves something I’ve mentioned previously, the “velocity of money” — the speed through which economic activity moves through the system. The idea of a stimulus plan is that the government isn’t just engaging in economic activity directly, but that the beneficiaries of that activity will spur additional activity. In other words, you get money via a tax cut or a job on an infrastructure program and you use some of that money to buy groceries, creating jobs for farmers and checkout people who spend their money, etc., etc.

You want the money to circulate smoothly and efficiently from those who have it to those who need it. That doesn’t mean everyone needs to spend the money instantly. But it means that when people want to park their money, those funds should come available to other people who have good business opportunities that could be exploited with the assistance of a little credit. That’s where a healthy financial system comes in.

You may have heard tales from Japan’s “lost decade” in which stimulus measures failed to actually get the economy moving. Part of the problem was somewhat ill-conceived and ill-executed stimulus. But perhaps a bigger issue is that the didn’t actually clean up their banking system. Instead, they put it on life support. And then they used fiscal stimulus to put employment on life support. But we don’t want life support, we want stimulus that actually brings us back to life. And that requires a financial rescue package. Of course it also requires a financial rescue package that works and the jury’s still out as to whether that’s what the administration’s come up with.